I read a wonderful report on blended finance recently published by British International Investment and Boston Consulting Group (BCG). It is a rare report by an entity that has invested in quite a few blended finance transactions and so the report is quite practical. It is the type of a report that I can use for a teaching session. [Report]
One key takeaway from the report was: Development finance institutions (DFI) are not the pioneers – they are the scalers.
The report indicates that the role of the DFI is to bring in commercial capital after other investors have created several decades of track record of funding and de-risking a sector. Think microfinance, affordable housing – areas with a solid track record among impact investors and specialised investors but still considered risky by commercial players like international banks, insurance companies and pension funds, etc. DFIs step in to crowd in commercial capital once the model is proven.
But what about blended finance structures designed for newer areas like climate-smart agriculture or rooftop solar for MSMEs or debt for climate tech startups? These “pioneering” structures are too risky even for DFIs. They need patient, loss-tolerant, and concessional capital to get off the ground. Characteristics that philanthropic capital has. In fact, DFIs may also be able to support such structures but only after the concessional capital is ready to derisk the DFI, just like the DFI does for the commercial investor in case of the proven models.
The only problem – such loss-tolerant concessional capital is limited. Also, such sources of capital face the dilemma and the scrutiny of supporting quasi-commercial opportunities like these.
So here’s a humble suggestion to those planning to spend money on another report, study, conference, or panel discussion on blended finance:
– Skip the event or study budget and fund a pioneering structure instead.
We’ve got enough reports and discussions. What we need now is capital backing real innovation.
You might wonder, what would a piddly amount of USD 50-120k, that you plan to spend on a report, could do for a blended finance structure. I can tell you that this amount can unlock 10-30 times additional funding. We did this back when I was in Caspian Debt, across atleast 3 different transaction types. We had 10+ years of track record with such structures and with close to zero losses. And yet, we couldn’t find capital to scale these structures because most investors considered these too risky or not enough “risk adjusted returns” even after 10 years of track record. It is time to change that. We will do fine with one less report on blended finance.
Avishek Gupta 